Are House Prices Turning Unaffordable?

Homes haven’t become any unaffordable but the real estate story is turning out to be a dismal one for the first home buyers. They give an impression of being squeezed out of contention by the investors.

First home buyer’s predicament

Continued undersupply has raised demand over the last couple of years and investors are outbidding each other to get the pie. This, as one can expect, has brought house prices to levels where the first home buyers are finding extremely hard to purchase.

Lenders are not too willing to service loans

While there are grants and first home buyer’s savings scheme in place, there are hindrances aplenty which this segment of the market faces. For instance, the lenders have a lackadaisical attitude towards this buying-class and the loans serviced to them often come at higher interest rates, high upfront fee and Mortgage Insurance.

Coming to the question, are property prices really unaffordable (or anywhere close to it), a researched answer has to be a ‘NO’.

Unaffordable prices- a myth

The myth of unaffordability is perpetrated because of a perception error. People feel that they would have had to pay a lot less than what they have to pay today to get the same home. They forget that while house prices have increased by 66.7% over the last decade, household income has risen by 70.6%, too.

Put differently, the hike in house prices is not ‘real’ but a ‘nominal’ one and it comes to nothing when adjusted for inflation and rise in household income.

Government’s alertness required

Returning to the first home buyer segment, their contribution to the Australian property market touched levels scraped in March 2004- 14.9% (January 2013) of owner-occupier commitments. Things have improved only marginally over the last year. While the government may take its own time to address issues of undersupply, it will do well to look at the predicament of the FHBs as quickly as it can.

Do you feel prices will decline across capital cities in 2014-15?